Home / Opinion / Views /  Mint Explainer: Are some freebies better than others?

The Supreme Court wants a national debate on the rampant freebie handouts by states in India. But a freebie culture unites India. All political parties north and south of the Vindhyas hand out doles to the masses, particularly around elections—from free power and water and loan waivers to computers, grinders, TVs and bicycles. So, where should politicians draw the line? The Supreme Court has wondered recently if we need a law to end the freebie culture. Of course, there is a law to keep a lid on government spending—the Fiscal Responsibility and Budget Management (FRBM) Act—but it needs much more teeth, in line with global best practices.

What are freebies?

There was recently an engaging debate on the definition of a freebie in the Supreme Court. Solicitor General Tushar Mehta pointed out the dangers of “false promises burdening the finances in such a way that they destroy the national economy", pointing out free handouts of TVs, electricity, water, etc.

Then Chief Justice N.V. Ramana urged against constricting the definition of a freebie into “water-tight compartments", pointing out “a shaving kit for a barber, a bicycle for a student, equipment for a toddy tapper or an iron for a washerman change their lifestyle and uplift them".

The Reserve Bank of India (RBI) defines freebies by distinguishing them “from public/merit goods, expenditure on which brings economic benefits, such as the public distribution system, employment guarantee schemes, states’ support for education and health". But free electricity, water, public transportation, waiver of pending utility bills and farm loan waivers are “often regarded as freebies, which potentially undermine credit culture, distort prices through cross-subsidization eroding incentives for private investment", said the central bank in a recent report.

For many states, the debt growth has outpaced GSDP growth over the past five years,
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For many states, the debt growth has outpaced GSDP growth over the past five years,

Over the years, India has rolled out product-based subsidies (from food to fuels) and people-oriented ones (free electricity, water, farm loan waivers, etc.). It’s the latter category that the RBI appears more worried about. Indeed, freebies, what Prime Minister Modi referred to as “revdi" culture, have sent the debt levels of many states soaring.

Still, it’s a complex debate. There is already a political storm over what constitutes freebies and their desirability and impact.

Delhi Chief Minister Arvind Kejriwal has demanded that governments should provide free education, healthcare and electricity up to 300 units to every citizen. “Those who call this a freebie scheme and free ki revdi should be declared gaddar (traitor) to this country," he said.

Meanwhile, DMK has approached the Supreme Court challenging the definition of freebies and asserting free services help “secure social order" and “economic justice". Tamil Nadu’s finance minister Palanivel Thiagarajan argued, “Who decides what is a freebie as opposed to an essential good/service provided by a responsible government?"

Impact of freebies on the fiscal health of states

Freebies are rampant in India and unite all states and most political parties. As Justice Ramana caustically observed, “We find that in this issue, all political parties are on one side… everybody wants freebies, everybody!" Indeed, the freebie culture is not just restricted to Kejriwal’s Aam Aadmi Party. It afflicts all.

There is no north-south divide here as well. Southern states like Andhra Pradesh and Tamil Nadu may do well on socio-economic indicators but still roll out many populist schemes. Politicians promise to offer the electorate free power, laptops, TVs and mobile phones before elections.

In the recent Uttar Pradesh assembly elections, too, all political parties, including the Bharatiya Janata Party (BJP), competed with each other in handing out doles. The BJP promised free power to farmers for five years, two-wheelers for meritorious college girls and free public transport for women over 60.

Rival Samajwadi Party promised debt waiver for farmers, free power for irrigation, 300 units of free electricity for domestic use, and more.

The RBI report observes freebies have exceeded 2% of gross state domestic product (GSDP) for highly indebted states such as Andhra Pradesh and Punjab.

For many states, the debt growth has outpaced GSDP growth over the past five years, observes RBI, pointing out that it's unsustainable. Punjab, Rajasthan, Bihar, Kerala and West Bengal are India’s most indebted states, and most of them will see their debt-GSDP ratio vaulting over 35% by 2026-27.

While some freebies may have damaged the financial health of states, some experts have pointed out the positive societal impact in some instances. Studies have shown free bicycles increased girls’ participation in secondary schools by 30% in Bihar. Free laptops, too, improve the quality of education and involvement of students in schools and colleges, argue some, a bit like mid-day meal schemes. So, it’s a contentious debate.

What is the solution?

The Supreme Court has called for a national debate on the freebie culture in India, including the possibility of the Centre framing a law to control it. What could be the broad contours of such a law, if at all, wondered Justice Ramana. “Suppose the Centre makes a law that states cannot give freebies. Will, such a law, be open for judicial scrutiny?" he observed,

In 2014, the Election Commission added a new chapter to its Model Code of Conduct to scrutinize poll manifestos, and it has, on occasion, questioned political parties. But it recently told the apex court it couldn’t regulate the decisions of political parties.

A law already exists to keep the Centre’s and the states' spending on a tight leash—the FRBM Act. It only needs more teeth to become more effective.

The FRBM Act came into effect in 2003, setting fiscal deficit targets for the Centre and the states, eventually hoping to eliminate the revenue deficit. But the FRBM targets have been pushed back several times. After the Covid crisis, too, the government found it difficult to meet the mandated fiscal deficit target of 3% by 2020-21. The fiscal deficit slipped to 9.5% in 2020-21 and about 6.8% in 2021-22. Finance minister Nirmala Sitharaman promised an amendment to the FRBM Act.

For states, the FRBM target is 3% of the GSDP—for any relaxation from this target, states need the approval of the Centre,

The FRBM has failed to control the spending of the Centre as well as the states for two reasons. First, it’s easy for the Centre to modify its FRBM targets. It can do so by just making a mention of it in the Finance Bill, which outlines the taxation and spending plans of the government for the fiscal year. And many states manage to meet the FRBM targets in a normal year simply through off-budget borrowing.

In fact, off-budget balance sheet borrowing of states may have touched a decadal high of about 4.5% of gross domestic product (GDP), or about 7.9 trillion, in FY22, according to a study by Crisil Ratings, a rise of about 100 basis points from FY20.

Entities owned by the states have done these borrowings. Crisil estimates that around 4-5% of states’ revenue will go towards servicing such guarantee obligations, reducing the ability of state governments to fund capital expenditure. Crisil attributes this trend to two reasons. First, constrained revenue growth due to the pandemic has seen a rise in fiscal deficits, well above the historical levels of about 3%. And then, to borrow more, states need the consent of the Centre under the FRBM Act.

The lessons from the global experience

Debt ceilings are difficult to bypass in some developed economies. A debt surge above the prescribed limits can trigger government shutdowns, as we have seen in the US. Some other countries, too, have similar provisions. Sitharaman has called for all government spending to be routed through the Budget. That in itself would be a big reform.

Unchecked, government spending on welfare schemes can often spiral out of control. The crisis in Greece, and its ripple effects in other parts of Europe, is one such example. The budget deficit of Greece exceeded 15% of its GDP in 2009 and triggered the eurozone debt crisis. The subsequent austerity measures required Greece to improve how it managed its public finances, particularly its pension system.

The RBI, too, has sounded a note of caution. “The recent economic crisis in neighbouring Sri Lanka is a reminder of the critical importance of public debt sustainability. The fiscal conditions among states in India are showing warning signs of building stress," it observed.

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